What Facebook worries mean for Twitter IPO

Twitter also wrestling with growth of user base, effective use of ads

By

BenjaminPimentel

Bloomberg

Mark Zuckerberg, Dick Costolo

SAN FRANCISCO (MarketWatch) — Facebook Inc.’s comments about being less aggressive with its NewsFeed ads and signs of eroding teen use may help investors decide whether to make a bet on the other giant of social media — Twitter.

Facebook’s disclosures, which ended up overshadowing its strong quarter and triggered a roller coaster ride for its stock, come at a critical time with just a week to go before Twitter’s
TWTR, -1.79%
expected initial public offering.

Facebook spooked investors Wednesday afternoon by disclosing that it has seen a decline in teen usage in the U.S., reigniting the debate on whether the site has becoming less popular among young users. It also said it won’t be ramping up NewsFeed ads in the future, alarming investors who had been banking on that part of its business to continue showing strong growth. Facebook’s shares recovered from their initial drop, trading up 2.2% to $50.14 by late Thursday afternoon.

Both issues are extremely relevant to Twitter. Like Facebook
FB, -1.82%
Twitter has also been growing its user base at a slower rate.

Facebook said it now has 1.19 billion monthly active users, a year-over-year gain of 18%, compared to the previous quarter when it posted a 21% growth. Twitter had reported a monthly active user base of 232 million in its fiscal third quarter, up 39% from the year-earlier period, a slower pace compared to its 44% growth rate the previous quarter.

Does Twitter also have a teen problem?

Victor Anthony of Topeka Capital doesn’t think so. He notes that Twitter, which has more than 232 million users, is growing two times faster than Facebook, which now has about 1.2 billion members.

“From what I have been seeing, Twitter does not have a teen issue,” Anthony told MarketWatch. “When teens learn how to use it, it becomes very sticky. Teens from what I understand love Twitter because of its open distributive nature.”

Rick Summer of Morningstar has a different view, arguing that of all the issues Twitter faces, its ability to grow its user base — especially among young users — will be most important as it prepares to go public.

He did say that there is a “bull case” to be made that Twitter, “given the uniqueness of the information and how it can be personalized” can continue growing.

“I think the most challenging hurdle for Twitter is how to get new consumers to consume tweets,” he told MarketWatch. “It’s a very different social network. People are coming to it specifically for information. It’s not a two-sided network communication that is as deep as Facebook.”

In fact, Summer downplayed Facebook’s so-called teen problem, affirming the view that the Menlo Park, Calif.-social network has already become a utility used by more than a billion people for a range of tasks both in their private lives and at work.

“In our thesis, we have not been overly concerned about what teens are doing on the platform,” he said. “I think it’s very tough to suggest that what someone is doing at the age of 14 is a good predictor of what they’re going to be doing at the age of 24.”

Facebook’s decision to be less aggressive about running ads on its popular NewsFeed feature highlights a reality Twitter is also wrestling with: Social media advertising is still relatively new, and marketers and social networks are still trying to figure out how best to use it.

But one thing is clear from Facebook’s report and its overall experience: Social ads are a money maker. In fact, Anthony of Topeka argues, “The read-through for Twitter should be a bullish one.”

Anthony is so upbeat on Twitter he has given the stock a pre-IPO buy rating with a price target of $54, well above the company’s $17 to $20 price range.

“The clear read-through for Twitter is that after several years of monetizing advertising, accelerating revenue growth is possible with the right ad formats, targeting techniques, and pricing strategies, even at a high base,” he continued.

“The fact that Facebook was able to accelerate growth for the second consecutive quarter is impressive, I think. So investors who are concerned that Twitter’s torrid revenue growth rate cannot possibly continue can look to Facebook as an example, given that Twitter has yet to tap its monetization engine in a meaningful year.”

But even Facebook’s year of strong growth points to the need for constant fine-tuning in social marketing. In fact, Summer of Morningstar called Facebook’s decision not to be too aggressive with Newsfeed ads a smart move.

“That speaks to how prudently they’re managing the business,” he said. “There’s been a fear in the past of Facebook becoming spammy. They’re not going to do anything to detract from engagement which is ultimately the most important thing we heard in the quarter.”

That’s because companies like Facebook and Twitter are in what’s still essentially an evolving business model. “Two years ago, we had never heard of a Newsfeed ad,” Summer said.

That format propelled Facebook to explosive growth in the past year. “Now you have somewhat of a pause, and you need to have a pause,” he added. “Twitter will face the same thing.”

In other words, he said, Twitter’ will likely continue to fine-tune its system for selling ads. “The company is going to grow very quickly and then it will decelerate,” he said.“What really means is it creates volatility in the stock price.”

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